Chapter 18: Inventory and Production Management Cost Accounting Principles, 8e Raiborn and Kinney © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives What value chain relationships are important to organizations? What costs are associated with buying, producing, and carrying inventory? How do push and pull systems control production? Why do product life cycles affect profitability? What is target costing, and how does it influence production cost management? What is the just-in-time philosophy and what modifications does JIT require in accounting systems? What are flexible manufacturing systems? Why are lean enterprises important in today’s business environment? How can the theory of constraints help in determining production flow? (Appendix) How are economic order quantity, order point, and safety stock determined and used?

Inventory Items Inventory is often a firm’s largest investment Merchandise for resale Manufacturing raw materials, work-in-process and finished goods Firms today should minimize inventory while meeting customer demands

Value Chain Suppliers Production plants Finished goods Customers and Suppliers may be internal or external Suppliers Production plants Finished goods Distribution centers Customers

Production Systems Push Systems Pull Produce as needed Minimal storage Produce in anticipation of customer orders Store raw material, work in process, and finished goods inventory Pull Produce as needed Minimal storage

Product Life Cycles S A L E T I M E Development Stage

Introduction Stage Substantial costs including engineering changes, market research, advertising, and promotion Sales price matches similar or substitute goods Sales low Introduction Stage T I M E S A L E

Growth Stage Increased sales Quality may improve Prices stable Growth T I M E S A L E

Maturity Stage Sales stabilize or decline slowly Firms compete on selling price Costs at lowest level Maturity Stage T I M E S A L E

Decline Stage Waning sales Dramatic price cuts Cost per unit increases as fixed costs are spread over fewer units Decline Stage T I M E S A L E

Just-in-Time Eliminate any process or operation that does not add value Continuous improvement in production/performance efficiency Reduction in total cost of production/performance while increasing quality

Traditional Manufacturing Smooth operating activity steady use of workforce continuous machine utilization Spread overhead over a maximum number of products Inventory levels high enough to cover up inefficiencies in acquisition and/or production

JIT Plants Minimize material handling time, lead time, movement of goods Use manufacturing cells which allow for visual controls, greater teamwork, quick exchange of vital information Reduce storage Increase throughput Develop multiskilled workers Use automation—programmed factory equipment

Manufacturing Methods Flexible Manufacturing System (FMS) Network of robots and material conveyance devices monitored and controlled by computers Modular factories Customization Quick, inexpensive production changes Computer-Integrated Manufacturing (CIM) Two or more FMSs connected via host computer and information system

Theory of Constraints (TOC) Flow of goods through a production process cannot be at a faster rate than the slowest bottleneck in the process Eliyahu Goldratt

Constraints Constraint—anything that confines or limits a person or machine’s ability to perform a project or function Human constraints Material constraints Machine constraints Place quality control points before bottlenecks

Questions What is the difference between push and pull systems of production? What is target costing? What is the just-in-time philosophy? How does JIT affect production?

Potential Ethical Issues Producing inventory not needed driven by achieving operating profits Avoiding innovative production and inventory driven by avoiding short-run costs Blaming suppliers for inventory mistakes caused by management Failure to write down obsolete or spoiled inventory in a timely manner Using coercion to force supplies to give price concessions Using the adoption of emerging production and inventory methods to fire workers